Negative gearing changes needed more than ever, says McKell

A NEW report suggests negative gearing reform is needed more urgently now than when the last federal election was held in 2016, as the country inches closer to a vote that could bring about the changes, according to the McKell Institute.

The McKell Institute's Levelling the Playing Field report, authored by Professor Richard Holden, echoes the Institute's 2015 report that recommended grandfathering negative gearing arrangements for all currently using it, and restricting new negative gearing arrangements to new properties.

That policy was taken to the 2016 campaign by the federal Labor party, which is heavily favoured to win the next election, due in the first half of next year.

The government has suggested that a recent drop in property prices means negative gearing reform should be abandoned, while analysts including SQM Research, AMP Capital's chief economist Shane Oliver, and a number of industry groups have suggested the changes would be detrimental to the property market.

The new report said the case for negative gearing reform today is actually stronger than in 2015.

"The policy is still the most appropriate approach to reforming negative gearing. It will level the playing field between owner-occupiers and investors, bolster financial stability, improve the budget bottom line, and encourage new construction," Holden said.

The report bases its view on three key factors – worsened housing affordability, increasing costs to taxpayers and a potential boost to new housing construction.

"Housing is actually less affordable than in 2015, even in Sydney (where the median Sydney house price today is 17.2 times the median income, versus 16.9 times the median income in 2015," Holden said. "On most measures housing is less affordable now in Sydney and other capitals – like Melbourne and Canberra – than it was in 2015."

Australian Bureau of Statistics data shows the price to income ratio for households worsened in Melbourne from 11.13 in 2015 to 13.29 currently, and from 11.15 to 12.53 in Canberra. Hobart's nation-leading price growth has pushed up its ratio from 6.73 to 8.17, while more modest gains were seen in Brisbane, to 9.55, and in Adelaide to 8.49. Perth and Darwin were the only capital cities that saw an easing over the period.

The report cited rising interest rates, especially on interest-only loans, as the reason for the cost of negative gearing to the Australian taxpayer having lifted by $1.6 billion.

It also said restricting negative gearing to new homes would provide a much-needed boost to new housing construction.

"The shift to negative gearing for new construction only may also provide incentives for state and local governments to adopt policies that increase prospects for new construction. A boost to construction would also have a positive economic effect."

McKell Institute executive director, Sam Crosby said that anyone saying the current correction in the housing market is a reason to abandon negative gearing reform is "either misguided or cynical".

"Using the mood of the day to run a scare campaign against reasoned, long-term structural reform is exactly the sort of shallow kneejerk politics people are tired of.""Even in Sydney, where the downtown has hit hardest, housing is still less affordable today than it was when Labor took negative reform to the 2015 election. Meanwhile, we desperately need to bring new housing stock to market, and limiting negative gearing tax breaks to new homes would help do just that."

AMP Capital's Shane Oliver has highlighted negative gearing as a main driver of expectations that Sydney and Melbourne will experience a peak to trough fall of 20% to 2020.

"The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact potentially accentuated by further out of cycle bank mortgage rate increases and expectations that negative gearing and capital gains tax concessions will be made less favourable if there is a change of Government at the coming Federal election.

"If anything the risks are on the downside, particularly if negative gearing and capital gains tax arrangements are changed. So there is more to go yet!" Oliver said earlier this month," Oliver said.

SQM Research's Christopher's Housing Boom and Bust Report founded its base case forecast for dwelling prices across the country in 2019 largely on a change in federal government and subsequent negative gearing and capital gains tax changes, which would see further cooling in the Sydney and Melbourne markets of another 6% and 9%.

While the base case also took in no interest changes until at least late 2019, the Australian dollar remaining in the vicinity of US$0.65 to US$0.75, and a slowing economy, should negative gearing changes not be implemented then losses in Sydney and Melbourne prices would be notable tempered, the average capital city softening of between 3% to 6% would be reined in to between 1% and 4%.

"The looming changes of negative gearing and capital gains tax are increasingly weighing on investor sentiment. Quite frankly, implementing these changes during a housing downtown is very risky and may trip the economy into a recession," Christopher said.

Meanwhile, industry groups have suggested supply of new housing would be reduced and decimate the property market should the changes be introduced.

Cadence Economics said its own modelling showed up to 42,000 less new dwellings would be built across the country; up to 32,000 less full-time jobs as a result; up to $11.8 billion less building activity and up to $210 million less renovation building activity.

Meanwhile the Property Investment Professionals of Australia and the Propery Investors Council of Australia warned that the proposed changes will decimate the property market.

Doron Peleg, chief executive officer of Riskwise research, earlier this month said potential changes to negative gearing and capital gains tax would put off-the-plan units at their "highest risk ever", reducing demand to purchase rental properties due to the creation of primary and secondary markets, and causing new dwelling prices to decline in many regions.

Earlier this year, research commissioned by the Australian Housing and Urban Research Institute and conducted by researchers from Curtin University and Griffith University suggested a progressive rental deduction for investors cushions less wealthy "mum and dad" investors from significant drops in tax savings, and may be an appropriate policy option.